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Friday, March 04, 2016

Stocks Gain after Digesting Labor Report

Charles Schwab: On the Market

Posted: 3/4/2016 4:15 PM ET

Stocks Gain after Digesting Labor Report

U.S. stocks finished the trading session higher, allowing the major
domestic indexes to post a third-straight week of gains, as energy and
commodity issues continued to rebound, bolstered by an extension of
gains for crude oil prices. In economic news, traders digested a mixed
February labor report, which showed stronger-than-expected job growth
and a surprising decline in average hourly earnings. Treasuries, gold
and the U.S. dollar were all lower.

The Dow Jones Industrial Average (DJIA) advanced 63 points (0.4%) to
17,007 and the S&P 500 Index was 7 points (0.3%) higher at 2,000,
and the Nasdaq Composite gained 10 points (0.2%) to 4,717. In heavy
volume, 1.4 billion shares were traded on the NYSE and 2.2 billion
shares changed hands on the Nasdaq. WTI crude oil increased $1.35 to
$35.92 per barrel and wholesale gasoline was $0.03 higher at $1.33 per
gallon, while the Bloomberg gold spot price lost $2.35 to $1,261.90 per
ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to
six major world currencies—was 0.3% lower at 97.33. Markets were higher
for the week, as the DJIA increased 2.2%, the S&P 500 Index added
2.7%, and the Nasdaq Composite Index gained 2.8%.

H&R Block Inc.
(HRB $28) posted a fiscal 3Q loss ex-items of $0.34 per share, wider
than the $0.24 per share shortfall that was expected, as revenues
decreased 6.7% y/y to $475 million, below the expected $502 million. The
company said this tax season has been marked by the continued impact of
fraud on the industry, the continuing trend of taxpayers filing their
returns later in the season and tax refunds taking longer to process.
Shares of HRB fell sharply.

Staples Inc.
(SPLS $10) announced 4Q EPS of $0.26, two cents south of forecasts,
with revenues decreasing 7.0% y/y to $5.3 billion, compared to the
projected $5.4 billion. Shares closed lower even as SPLS' 1Q earnings
outlook came in mostly above expectations.

Nonfarm payrolls (chart)
rose by 242,000 jobs month-over-month (m/m) in February, compared to
the Bloomberg forecast of a 195,000 increase. The initial rise of
151,000 seen in January was revised to a gain of 172,000 jobs. Excluding
government hiring and firing, private sector payrolls increased
by 230,000, versus the forecasted gain of 190,000, after expanding by an
upwardly revised 182,000 in January, from the 158,000 rise that was
initially reported. The unemployment rate remained at 4.9%, as expected, while average hourly earnings dipped 0.1% m/m, versus projections of a 0.2% gain, and January's 0.5% increase was unadjusted. Finally, average weekly hours declined
to 34.4 from January's unrevised 34.6 hours level, where it was
expected to remain.Employment gains were seen in health care and social
assistance, retail trade, food services and drinking places, as well as
educational services, while job losses continued in mining.

The markets are grappled with the mixed report as job growth came in
much stronger than expected. However, the accompanying unexpected dip in
wage growth may have kept Fed rate hike expectations in check due to
its implications on inflation, which continues to run below the Central
Bank's target, as discussed by Schwab's Chief Fixed Income Strategist,
Kathy Jones in Where Does the Fed Go From Here?. Also, Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, points out in his latest Schwab Sector Views: Overreactions and Opportunities,
recession fears have risen, and the market is now expecting fewer Fed
rate hikes this year. We believe those fears are overdone and that
chances of a recession, while higher than late last year, are still low.
With the labor market tightening, we believe the Fed will be able to
move toward normalization of monetary policy with a rate hike or two
this year—less than expected late last year, but still beneficial to
much of the financial sector. Read both articles at www.schwab.com/marketinsight and follow Schwab and Kathy on Twitter: @schwabresearch and @kathyjones.

Treasuries declined, with the yield on the 2-year note rising 2 basis
points (bps) to 0.87%, while the yields on the 10-year note and the
30-year bond gained 4 bps to 1.88% and 2.70%, respectively.

Europe higher, Asia posts modest gains

European equities finished higher, with mining stocks continuing their
recent rally, while traders grappled with the stronger-than-expected
U.S. February job growth figures, though the wage component of the
report was on the disappointing side. Ahead of next week's monetary
policy meeting from the European Central Bank, the Stoxx Europe 600
Index posted a weekly rally of over 3.0% after rising four out of the
last five sessions. The euro was higher versus the U.S. dollar and bond
yields in the region moved to the upside. In economic news, growth in
German construction output accelerated in February as reported by
Markit, while Italy's 4Q GDP growth was unrevised at a 0.1%
quarter-over-quarter pace, matching forecasts.

Stocks in Asia finished mostly higher extending a positive week that saw
global sentiment improve after China announced further stimulus
measures and data out of the U.S. and Europe that was relatively upbeat.
Also, traders may have treaded with some caution ahead of today's
February labor report in the U.S. Japanese equities rose, posting a
four-session winning streak, after showing some late-day resiliency as
the yen gave up early gains. Chinese stocks advanced, bolstered by
reports that the government intervened to support the markets before the
start of the country's annual economic policy meetings over the
weekend, per Bloomberg. The meetings are for the government to set a
five-year plan for the economy and will include its annual growth
target. Australian securities gained ground with continued strength in
basic materials stocks helping offset a report showing the nation's
retail sales rose at a smaller-than-expected rate in January. Finally,
Indian equities nudged higher, extending their rally to four sessions,
while South Korean listings dipped trimming the weekly gain.

Stocks higher for third-straight week

Domestic stocks posted their third-consecutive week of gains with energy
issues leading the major sectors broadly higher, along with the
materials sector, as crude oil and other commodity prices continued to
recover. Also, the recently-battered financial sector was among the
standout winners. Relatively favorable reads on U.S. manufacturing and non-manufacturing activity from the ISM teamed up with a mostly upbeat Fed Beige Book,
to help ease unnerved global sentiment, along with some positive
reports out of the eurozone. Moreover, another dose of disappointing
Chinese manufacturing and services sector data was met with the
announcement of further stimulus measures from the People's Bank of
China (PBoC) in the form of a 50 bp cut of its banking sector reserve
requirement ratio—the amount of cash that banks need to keep on reserve
instead of using in the financial system—to 17.00%.

As noted in the Schwab Market Perspective: Neutral Does Not Mean Boring,
the sharp downward move by stocks to start the year has abated, but
volatility is likely to persist. We believe the bulls will ultimately
win the tug-of-war, but risks are elevated. The roller coaster ride in
stocks is reflected in the mixed readings among recent economic
releases. This, combined with signs some inflation has re-emerged,
complicates the Fed’s upcoming decisions on rates and adds to
uncertainty. Global stocks have joined in on the wild ride, with some
comforting words from China aiding the rebound; but the upcoming
European Central Bank decision could ignite further volatility. Read
more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Next week's data light in the U.S. but focus could be on the other side of the pond

Next week, the U.S. economic calendar will take a bit of a breather, with the key releases being the NFIB Small Business Optimism Index, wholesale inventories, and weekly jobless claims.
However, the global markets will likely focus across the pond, with the
highly-anticipated monetary policy meeting from the European Central
Bank (ECB), which will be preceded by the eurozone's preliminary 4Q GDP
report. As noted in the Schwab Market Perspective,
the ECB needs to avoid actions that may undermine the financial sector
to help sustain the stock market rally. Investors may want to watch for
several key developments that could help determine the direction for
Europe’s stock market. A cut to the key rate on banks’ deposits at the
ECB is priced into futures markets, but a bigger cut may be viewed
negatively by investors since it may raise banks’ costs. An introduction
of a tiered system to shield some of banks’ deposits from the cost of
negative interest rates would likely be viewed as a positive by the
stock market. Any expansion of the ECB’s quantitative easing (QE) asset
purchase program from the current monthly pace of 60 billion euros may
be welcomed by market participants. Read more at www.schwab.com/marketinsight, and follow us on Twitter: @schwabresearch.

Schwab Center for Financial Research ("SCFR") is a division of Charles
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